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A global minimum tax on U.S. companies is likely to become a major battleground for
the technology and pharmaceutical sectors as Congress hashes out details on the Big
Six tax reform plan.

In keeping with long-time GOP priorities, the
framework announced Sept. 27 would provide a full exemption for the overseas profits of U.S. companies, converting
the U.S. to a territorial system in line with much of the rest of the world. To prevent
companies from “shifting profits to tax havens,” the proposal would protect the U.S.
tax base by “taxing at a reduced rate and on a global basis the foreign profits of
U.S. multinational corporations.”

An administration official said Sept. 26 that the goal is to ensure that there is
“at least a certain level of tax” on “companies’ operation in tax haven countries.”

Targeted Income?

The proposal doesn’t specify whether it would target income from intangible assets
such as intellectual property—a key aspect of Rep. Dave Camp’s (R-Mich.) 2014 draft
plan. Nor does it include the Camp draft’s controversial “round-trip”
rule, which would have taxed intangibles-related income at a higher rate if it were
used for sales or services within the U.S.—a proposal that raised the ire of the pharmaceutical
lobby.

The outline also states that the reform would “level the playing field” between U.S.
and foreign headquartered companies, without any further details about how this would
be achieved.

David Lewis, vice president for global taxes at Eli Lilly and Co., the Indianapolis-based
pharmaceutical company, said he’s encouraged by the outline. Lewis had criticized
the Camp draft’s base erosion rules for disproportionately taxing U.S.-based, IP-reliant
industries.

“We are heartened, greatly heartened by the fact that Lilly’s message, the biopharmaceutical
industry’s message, has been heard, that a level playing field is paramount,”
Lewis said in an interview with Bloomberg BNA. “I believe the committees understand
the need to have any anti-base erosion rule not disfavor U.S. companies. So I think
they will keep that important consideration in mind.”

Mark Nebergall, president of the Software Finance and Tax Executives Council, told
Bloomberg BNA the outline didn’t have enough details to determine whether it would
affect technology companies negatively or positively.

“We’re just at the very, very top level,” Nebergall said. “If they’re going to pick
on different industries in regard to how the minimum tax works, then we might have
a problem.”

Level Playing Field

The outline’s language on leveling the playing field leaves much to interpretation,
and has left some wondering whether the package would ultimately include enhanced
earnings-stripping rules and other measures that would target, or encompass, foreign
taxpayers doing business in the U.S.

“I wouldn’t be surprised if there are more examples of them being willing to impose
a structure that would overrule transfer pricing,” Payne said. “It would probably
have a disproportionate effect on inbounds. It would be designed to target transactions
where people are moving income out of the United States to another jurisdiction, irrespective
of whether it’s a U.S.-headquartered corporation.”

More Questions

Critics of a global minimum tax say it inevitably leads to inversions and takeovers,
and doesn’t result in a true territorial system. Multinational corporations may prefer
that the tax bill increase the deficit rather than raise rates on their global earnings,
Henrietta Treyz, managing partner and director of economic policy research at Veda
Partners, said in a Sept. 27 note to clients.

If the global minimum tax does try to target lightly taxed income, that could lead
to many more questions of how you determine that, according to practitioners.

“Under pooling rules, income might be viewed as low-tax, even though specific items
in that may be high-tax,”
John Ryan, a partner at Morgan Lewis & Bockius LLP in Palo Alto, Calif., told Bloomberg
BNA. “If it is just applied to low-taxed income, where is the line drawn?”

Free-market groups that have battled base erosion rules in the past also are gearing
up to oppose the global minimum tax proposal.

“We’re not wild about that, so we’ll be talking with Congressional leaders about it,”
Andrew Roth, a lobbyist at the conservative Club for Growth, said in an interview.
“The Club’s preferred corporate tax rate is zero and if it can’t be zero, we want
it to be as low as possible worldwide.”

To contact the reporter on this story: Alex M. Parker in Washington at
aparker@bna.com

To contact the editor responsible for this story:
Kevin A. Bell at
kbell@bna.com

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